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Time to bury the Budget

February 25, 2003

It is not easy to ask a finance minister to do himself out of a Budget speech. But Jaswant Singh would be doing the country -- and taxpayers -- a huge favour if he makes the coming Budget his last one. I mean, the last one with so many expectations built around it.

India is in a fiscal jam because we have grown used to elaborate Budget presentation exercises and unreasonable expectations, without any great emphasis on results. The process now needs to be reversed.

Budgets are instruments for allocating resources. You periodically need to change allocations if needs change, or if the resources needed for a purpose are too little. In this event, you could be cutting expenditure, or raising more taxes -- whichever is more appropriate.

In India, however, Budgets have focused almost exclusively on the revenue side of the equation, by raising taxes or giving concessions. And this has become counter-productive regardless of whether you make changes in the name of promoting greater equity (Rajnath Singh, etc) or greater simplicity (Kelkar, etc). Both approaches are wrong.

India's failures on the fiscal front stem from three areas -- all related to the way we treat the Budget.

There is an excessive focus on revenues without linkage to expenditures; there is a constant tinkering with taxes and rates; and there is an implicit belief -- now fanned by the electronic media and reinforced by elaborate print coverage -- that Budgets can really make a huge difference to the economy, companies or individuals.

Let's take the first point. At the operational level -- say, the spending ministries -- you need to be more dynamic in managing your finances based on revenue trends.

If revenues are weak, you need to reallocate resources to the most important projects or raise more resources for crucial projects.

This can only be done if resource-raising is linked to specific projects (like the fuel cess for financing the Golden Quadrilateral) and is self-limiting. It should end with the project.

The petrol and diesel cess should go once the Quadrilateral is completed.

Once you do this, you can raise resources whenever you have a project worth financing -- and not otherwise. Collecting money endlessly for the exchequer quite simply leads to financial indiscipline. If resource-raising is done this way, it can be delinked from the Budget as well.

The other problem with Budgets is the inherent instability they bring to the tax regime. The fact is, you can have any kind of tax regime, but you cannot make it efficient if it keeps changing year after year.

This is common sense. To make any system work, you have to allow it time to settle, so that everyone -- and especially the tax administration -- can learn to deal with it and improve their skills in ensuring compliance.

The setting up of various tax reforms committees only adds to this instability.

Chelliah or Kelkar, their recommendations are valid for a particular point of time. In a situation of dynamic change, committees make sense only if they are permanent in character, so that they can continuously monitor the reforms as they are implemented and keep suggesting small course corrections when needed.

Instead, what we end up doing is, go around in circles.

A simple example is dividend tax. P Chidambaram decided that the tax will be levied when post-tax profits are distributed as dividend. There were screams of protest.

When companies got adjusted to this idea, the tax rate went up. More screams.

Then another finance minister brought it down. This time, relief. But everyone knew this was not permanent.

Last year, Yashwant Sinha went back to the old way of taxing -- but with a TDS pre-emption. We have similarly tinkered around with taxes endlessly -- in the name of equity, reforms, convenience. You can now keep chopping and changing in the name of Kelkar.

When you keep altering the playing conditions year after year, you create instability.

Ultimately, it does not matter whether your corporate tax rate is 30 per cent or 35 per cent. What matters is whether you can collect it. It does not matter whether you have 10 exemptions or 100 -- as long as you can monitor compliance. But constant change can only guarantee an ill-administered tax regime.

If I were Jaswant Singh, I would use this Budget to broadly indicate the proportions in which revenues will be allocated for expenditure for the next five years. I wouldn't make any announcements about this reform or that, this tax or that. What I need to do I would do it piecemeal during the rest of the year. It is time to bury the Budget as an annual instrument of economic policy and change. It does more damage than good.

Run-up to the Budget 2003

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